Academic views on the Federal Trade Commission

There have been opponents and proponents of the Federal Trade Commission (FTC) since its creation in 1914 to “bust trusts” and since the Federal Trade Commission Act amendments in 1938 empowered the agency to police anti-competitive practices through a prohibition on “unfair and deceptive” practices. Academic debate about the FTC generally centers on the utility and efficiency of the agency given the historical context of its legislative authority.

The Nader Report

The 1960s saw an uptick in public awareness of fraud and deception involving consumers and a concomitant rise in calls for better consumer protections. The so-called Nader Report, in reality prepared by law student and lawyer volunteers working under Nader’s aegis, was presented to the Senate in January 1969. It critiqued the FTC for inadequacies in consumer protection, such as failure to identify pressing consumer protection issues and inefficient Commission action, largely stemming from partisan politics and agency mismanagement. The report called for sweeping changes in personnel, including hiring more economic analysts.

Posner's Critique, The Federal Trade Commission

Richard Posner, an influential figure in the law and economics movement and since 1981 a federal judge on the Seventh Circuit, authored a seminal challenge to the FTC in 1969, after having spent two years as assistant to former FTC Chairman Philip Elman, himself an advocate of reintroducing economists into FTC decision-making.

Posner claimed to go beyond the many previous criticisms of the FTC by challenging its very existence, ultimately concluding that the agency was near useless based on a study he made of 500-plus agency actions from the early 1960s. Posner surveyed not only cases brought under the FTC’s anti-restraint-of-trade, anti-monopoly authority, but also its authority to prevent unfair or deceptive practices, including violations stemming from advertising. He also criticized the agency for the what he viewed as an aggrandizement of its original 1914 antitrust authority and purpose, including the 1938 amendments enabling regulation of unfair and deceptive practices such as fraud.

Antitrust

Posner concluded that the antitrust authority of the FTC was largely duplicative of and inferior to, other more efficient government bodies such as the Department of Justice’s Antitrust Division that lacked some of the politicking and biases of the FTC agency structure. Furthermore, the 250-plus restraint of trade cases analyzed by Posner only led him to conclude that the outcomes were not justified under economic grounds, as there were high administrative and social costs and even deterrence of efficient practices.

Consumer Protection

Turning to consumer frauds, Posner theorized that market principles of competition and consumer incentives to seek information reduced fraud in the first instance, generally creating an efficient equilibrium where consumers get enough, but not too much or too costly, information about goods. Posner also argued that sufficient extra-agency remedies existed, such as competition, litigation, or complaining to department stores to stop carrying the complained-of goods. Posner acknowledged that some industries, such as the tobacco industry, have no incentive to compete on offering health-related information to consumers, but he postulated that competition would eventually whittle away any such information barrier. Dismissing the idea that small consumer harms were unsolved by alternative forces acting on sellers, Posner argued that the FTC’s role only created barriers to entry to market and opportunities to harass competitors through complaints, especially given the propensity of the FTC to focus literalistically on tiny details and thereby waste agency resources on cases with little social utility.

Recommendations

Posner ultimately concluded that the FTC cannot be fixed, relying in part on arguments about political influences and personnel that echoes the Nader Report. The politics of Congress gave too much power over the FTC to certain committee members, distorting the focus of regulatory efforts. The individual actors at the Commission sought to retain their jobs and increase personal power by increasing the scope of regulatory authority, using Commission positions as stepping stones to more lucrative private positions. He proposed reducing the role of the FTC and redistributing caseload to the courts and the DOJ as they are more efficient actors.

Pitofsky's Defense, Beyond Nader

Robert Pitofsky, former Chairman of the Federal Trade Commission from 1995 to 2001 and current Georgetown Law Professor, is known as a key figure in founding the modern FTC. He authored a defense of the agency’s advertising regulation in 1977, Beyond Nader: Consumer Protection and the Regulation of Advertising, after having served as Director of the Bureau of Consumer Protection for three years.

While only briefly mentioning Professor Posner’s free market criticisms, the article can be seen as a rebuttal and partial acknowledgment of criticisms aimed at the FTC from the 1960s and earlier. Although specifically acknowledging the inefficiencies and wrong-headed focus of the FTC during the early 1960s—the period during which Posner critiqued the FTC—Pitofsky dismissed the free market viewpoint espoused by Posner and defended the consumer-protection mission of the FTC.

Consumer Protection

Pitofsky challenged assumptions of free market theorists, citing Posner’s work, and argued instead that market failure caused consumer harm as evidenced by the fact that many key pieces of information necessary for consumers to make informed choices were unavailable. Absence of information, he argued, was caused by near-monopolistic or oligopolistic markets in which it is to the advantage of all sellers to avoid certain types of product claims.

Pitofsky found the alternatives to government regulation largely ineffective. Litigation by consumers was ineffective due to the relatively small individual harms and the difficulties in mounting a class action. Likewise, he found self-regulation to be inadequate because of expense and because standards set by an industry can easily run afoul of antitrust laws. Market failure and the lack of alternatives led Pitofsky to conclude that government regulation of advertising was necessary. The goal of such regulation, he argued, was to increase effective competition in the market.

Pitofsky justified the continuing regulatory role of the FTC by analyzing several important changes in the traditional FTC principles of advertising regulation. Section 5 of the FTC Act authorizes action against unfair or deceptive practices that injure consumers or competitors. Pitofsky criticized the FTC for its previous focus on deceptive practices to the exclusion of unfair practices, the grant of too much deference to the FTC in its interpretation of terms of advertisements, and its reliance on issuing rather ineffective “cease and desist” orders. He then highlighted the changes at the Commission that rectified these flaws, predicting that they would increase consumer welfare.

First, the evolution of a separate unfairness category of violations, “encouraged” by the Supreme Court case FTC v. Sperry & Hutchinson Co., resulted in a reading of unfair to include a broader swath of failure to disclose cases and the promulgation of more rules requiring disclosure of product information. Devoting Commission attention to disclosure addressed the need to close the gap in information caused by market failures. Second, the FTC de-emphasized its regulation of deceptive comparative price advertising—falsely claiming a product is “free” or “20% off”—and phony mock-ups used to advertise products on television, as these enforcement efforts were criticized for being very literal and too picky. Over-emphasizing the enforcement of these two categories created extra costs with no real increase in consumer benefits: rigid comparative price requirements were costly to advertisers; a simple alternative to case-by-case enforcement of phony mock-ups existed—disclosure of mock-ups in TV ads; and the consumer injury was low in both areas. Third, Pitofsky pointed to the adoption of corrective advertising as an innovative remedy above and beyond “pathetically inadequate” cease and desist orders. Pitofsky advocated expanding the use of corrective advertising sanctions, and proposed a three-part rule for imposing the remedy in order to maximize benefits to consumers and efficiently expend agency resources:

  • (1) the existence of material fraud or deception with respect to a major advertising scheme
  • (2) the fraud created misconceptions in a substantial number of consumer
  • (3) the misconception significantly influenced purchasing decisions at time of suit.

Recommendations

Pitofsky’s recommendations are largely a “change in emphasis rather than a complete break with prior practice,” and consist of advocating a continuing role for the FTC consistent with the changes and new programs it undertook between the early 1960s and 1977.